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Oct. 27 — The Department of Labor granted retirement advisers their wish with a batch of guidance
on its fiduciary rule.

Much of the
guidance addresses the best-interest-contract exemption, one of the most confusing aspects
of the rule for many in the industry. For example, the DOL clarified that the exemption
is broadly available for a wide variety of transactions relating to the provision
of advice in the retail investment market.

The exemption allows financial advisers to retirement investors to use certain compensation
arrangements that might otherwise be forbidden, as long as they put their client’s
best interest first.

The guidance was released Oct. 27.

Phyllis C. Borzi, assistant secretary of the DOL’s Employee Benefits Security Administration,
and the principal architect of the rule, said in a blog posting that the guidance
was based on the input the agency received from the financial services industry and
others.

“These questions are an important part of the regulatory process as they allow the
department to clarify important parts of the rule, and head off misunderstandings
that could lead to bad results for retirement savers, or financial services professionals,”
Borzi said.

The rule is effective April 10, 2017, with a transition period until full compliance
on Jan. 1, 2018. The DOL said in its guidance that during the transition, it will
focus on providing compliance assistance, rather than citing violations and imposing
penalties.

Robo-Advisers

Although robo-advisers have generally been considered fiduciaries, the DOL clarified
that they don’t get a blanket exemption.

The robo-advice industry has been exploding since startup firms such as Wealthfront
Inc. of Silicon Valley and Betterment LLC of New York pioneered the market. Traditional
firms such as Vanguard Group, BlackRock Inc., Charles Schwab Corp., Fidelity Investments,
Morgan Stanley and Bank of America Corp. have also entered the market.

Robo-advisers are expected to have about $2.2 trillion in assets under management
by 2020,
according to business management consulting firm A.T. Kearney Inc., based in Chicago.

The best-interest-contract exemption “does not cover advice provided solely through
an interactive Web site in which computer software-based models or applications provide
recommendations based on personal information that the investor supplies without any
personal interaction or advice from an individual adviser (i.e., robo-advice),” the
DOL said.

The department said it didn't make the full exemption “generally available for such
robo-advice based on its view that the marketplace for robo-advice is still evolving
in ways that appear to avoid conflicts of interest that would violate the prohibited
transactions provisions and that minimize cost.”

However, and with some exceptions, the exemption does generally apply to robo-advisers
that are level-fee fiduciaries, the DOL said. Such fiduciaries receive a fee based
on the value of a retirement investor's assets, the department said.

To contact the reporter on this story: Sean Forbes in Washington at
sforbes@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at
jmeyer@bna.com

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